What’s good for VW isn’t good for Germany

MatthewLynn

LONDON (MarketWatch) — Every time a crisis flares up in the financial markets over the fate of the euro — which is about every three or four minutes — there is one argument that will usually be delivered by defenders of the single currency with an air of smug finality.

At the end of the day, the Germans will support the euro, and bail everyone else out, because Germany has benefited so much from the single currency.

There’s a problem with this analysis, however.

It is complete nonsense.

Reuters

Germans enjoy a meal at a market hall in downtown Hanover, a bustling industrial and trading hub on the fertile plain of northern Germany.

True, Germany has appeared be getting richer. The economy has been growing, exporting more and more, and racking up huge trade surpluses. But the ordinary German hasn’t been getting any richer.

In fact, while the euro has been good for corporations, it has been terrible for the ordinary Heinz in the street. There used to be a saying “What’s good for General Motors is good for America.” It wasn’t necessarily true. It is perfectly possible, indeed quite common, for the interests of big companies and ordinary people to diverge.

Right now, people are making the same mistake — and assuming that what is good for Volkswagen and BMW is good for Germany. But that isn’t true either.

The voters have already caught on. Whatever bailout their leaders might agree to at one of the endless “save-the-euro” summits will simply get thrown out at the ballot box. And anyone who is banking on the Germans riding to the euro’s rescue is going to be badly disappointed.

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True, in some ways Germany does appear to have benefited from the single currency. Its economy has been growing at a reasonable rate. In 2011 it grew at 3%, a lot better than most advanced economies. The Bundesbank forecasts it will grow by 1% this year. Not great, but not bad either considering that recession is engulfing most of its neighbors.

Meanwhile, that trade surplus grows and grows. German exports grew by 11.4% in 2011, and show little sign of slowing down this year. The trade surplus reached 158 billion euros last year, the highest on record. The surplus was the equivalent of 5.7% of gross domestic product. For a comparison, China’s trade surplus is only the equivalent of 2% of GDP. It is Germany that is the real workshop of the world.

But hold on. If Germany is doing so great, shouldn’t we be seeing evidence of ordinary Germans getting richer? After all, a successful economy is meant to make people better off. The shops of Düsseldorf and Munich should be a loud cacophony of ringing cash registers, property prices should be soaring, and every designer label in the world should be descending on Berlin to help people get rid of all that money bulging out of their wallets.

It isn’t happening. Not convinced? Just take a look at the figures. If Germany is doing so great, why haven’t German retail sales risen? Consumer spending in Germany since the euro was launched has risen at a feeble 0.25% a year. Last year, consumer spending managed to edge up by 1.5%, the fastest rate in five years, but still a lot less than the economy expanded. That’s not exactly a boom.

Likewise, real wages. Unit labor costs have risen sharply in Italy, France and Spain since the euro was launched. They have hardly shifted at all in Germany. Indeed, it is only this year there have been some signs of wages rising, but only very modestly.

Or how about property prices? There has been some evidence of rising prices this year, but before that they were as flat as a punctured tire for the last decade. What happened to that German boom we keep reading about? There is no sign of it in the way that people are actually spending.

The measures by which Germany has done well are strong employment, big trade surpluses, and high corporate profits. The reason is simple. It has a massively undervalued exchange rate. This means it sells a lot of stuff abroad, and companies make a lot of money. But ordinary Germans keep working harder and harder — without actually getting any richer. Instead, everything extra they produce ends up in corporate profits, or else being recycled to the periphery through the banks or the tax system. It doesn’t make them any better off.

Worse, there are big problems ahead. However the euro crisis gets resolved, it is lose-lose for the Germans. Either the debts of all 17 countries get pooled — but if that happens, German debts will explode as they take on the liabilities of the periphery. Or else, the euro breaks up — in which case Germany will be stuck with massive debts in its banking system, and the government will have no choice but to take those onto its own balance sheet.

Ordinary Germans have rumbled that their political leaders may cook up rescue deals on their behalf at one of the endless “save-the-euro” summits that come around every couple of weeks. But ordinary Germans have already worked out that this currency isn’t working for them any more than it works for impoverished Greeks or the millions of unemployed Spaniards.

So any deal their leaders agree to is just going to get defeated at the ballot box — you can’t fool people into supporting a currency unless they can actually see that it is making them richer.

There may well be money in Germany that could ride to the rescue of the single currency. But that is precisely where it is going to stay — in Germany.

Stock markets may look like a bargain, and in many ways they are cheap. So are assets right across Europe. But they are only a buy if you assume that Germany will eventually bail the system out. If they won’t, you don’t want to go anywhere near them.

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